What is Monopoly?

In a monopolised market, there is only one firm selling a given product. When a monopolist tries to raise the price of the commodity he loses some but not all its customers. Entry to such an industry is restricted due to its high cost or other impediments.

Conditions of Monopoly

MR=MC pricing

P>MC

Features of Monopoly

A firm is a monopoly if it is the sole seller of its product.

There are no close substitutes available.

It can influence the price of a good.

Demand curve is the market demand curve and hence, downward sloping.

The reason why monopoly exists could possibly be that other firms find it unprofitable to enter the market.

Monopoly Numerical

Suppose a monopoly firm is producing a product at a constant marginal cost of $4.

Its demand curve is given as: P = 20 – Q

Now, to find MR we first find TR and then differentiate it with respect to Q.

TR = PQ = 20Q – Q^2

MR = 20 – 2Q

Now, equating MR to MC we get,

20 – 2Q = 4 (1)

From equation 1 we get,

Q = 8 and P = 12

Technical Barriers

A primary technical barrier is that the production of the good may exhibit decreasing average and marginal cost over wide range of output. The technology of production is such that relatively large scale firm are low cost producers.

Special knowledge of low cost productive technique, for example patent right, copy right or giving exclusive distribution rights to one firm.

Legal Barriers to Entry

Many pure monopolies are created as a matter of law rather than as a matter of economic condition. Government granted monopoly position is in the legal protection of products by patent. Prescription drugs, computer chips are examples of profitable products that are restricted from other competitors.

The Inverse Elasticity Rule

P – MC/P = 1/ep

Monopoly would choose to operate only in regions in which the market demand curve is elastic. If demand is inelastic then MR would be negative and MC will also be negative.

Example of Monopoly

United States Postal Service (USPS). We have all heard that the Postal Service is losing money. According to a report published in 2014, the USPS lost a staggering $2 billion dollars in just 3 months, despite cutbacks in service.

Absence of Supply Curve for the Monopolist

Supply curve explains one to one relationship between price and quantity supplied. But in the case of monopoly there is lack of one to one relationship between price and quantity supplied so, supply curve will not exist in the case of monopoly.

Case 1: Same quantity supplied at different prices.

D1 and D2 are two different demand curves with different price elasticity. MR1 and MR2 are corresponding marginal revenue curves. The monopolist is willing to sell Qm units to consumer 1 at price Pm1 and at the same time he is willing to sell Qm units to consumer 2 at the price Pm2 due to difference in the price elasticity of the demand. In fact, there is inverse relationship between price and price elasticity of demand. As there is no one to one relationship between price and quantity supplied, supply curve will not exist for the monopolist.

Case 2- Different quantity supplied at same price.

Here also d1 and d2 are two different demand curves with different price elasticity of demand. MR1 and MR2 are the corresponding marginal revenue curves. The monopolist is willing to sell Qm1 units to consumer 1 and Qm2 units to consumer2 at the same price Pm due to difference in the price elasticity of the demand. In fact, there is inverse relationship between price and price elasticity of demand. As there is no one to one relationship between price and quantity supplied, supply curve of a monopolist does not exist.

Monopoly Causes Dead Weight Loss

Dead weight loss is the loss of economic efficiency due to the monopoly pricing quantity which is not optimal for the society.

In the above diagram, quantity produced by a monopoly is Q1 and efficient quantity is Qc so the area of ΔABC is deadweight loss which is caused due to monopoly pricing.

Qc is the quantity which would have been produced if the firm was a competitive firm leading to efficient amount of quantity being produced.